Brady Dennis of the Washington Post brings up the spectre of moral hazard on the part of homeowners, who may not pay for their loans if they see the turmoil in the housing market and the inability of servicers to foreclose.

This is one of the unintended consequences of the spreading foreclosure freeze. Although there are no statistics on how many homeowners are taking advantage of a foreclosure moratorium to avoid making monthly payments, some economists warn that this practice could become more common if a national freeze is put in place, as some lawmakers seek.

This is called a “moral hazard” – the notion that borrowers might decide to stop paying back what they owe or continue to withhold payment because they see no repercussions.

To back this up, Dennis introduces all of one person – a Floridian who initially tried to keep up with his payments despite a recast interest rate and plummeting home price.

I’ve actually talked to people at NACA, the massive loan modification fair. I’ve corresponded with plenty of people trying to get HAMP modifications. Obviously there’s a selection bias there, because these people want to get an affordable payment. But they almost universally said that they view that mortgage payment as sacred – in fact, many of them were current at the expense of food or utilities. Their pride of ownership very clearly showed through. So the banks really don’t have to worry about this on a mass scale; Americans by and large want to pay their bills.

The other side of this is why it should be seen as guilty to live in a free house, but not guilty to supply false documents and forgeries to kick someone out of that house. Let’s not pretend that anyone is somehow on the moral high ground here, or that only borrowers have moral hazard and not the banks who got a no-strings bailout two years ago. The servicers, subject to an Obama Administration probe, have been found to exhibit the same kind of “wide variation” in quality and competence as any other part of this country.

A four-month-long Obama administration probe into five of the country’s largest mortgage servicers has discovered “a significant variation” among their operations, with some servicers “significantly worse than others” in how they handle home loans, U.S. Secretary of Housing and Urban Development Shaun Donovan said in an interview.

Mr. Donovan wouldn’t identify which companies were laggards in the HUD review, but he said the administration plans to make the results of its investigation public in the next few weeks [...]

Mr. Donovan said the issues discovered by his agency’s review go beyond the technicalities of foreclosures.

“The issues that we’ve seen around the affidavit process are potentially symptomatic of problems in other parts of the process as well, and we want to make sure that we are reviewing more broadly” how the industry operates, he said.

The servicers haven’t done their job either. They didn’t originate and underwrite the loans properly, they didn’t package the loans to investors properly, they didn’t modify loans for borrowers in trouble properly, and they didn’t foreclose properly. The “moral hazard” for borrowers is entirely of the doing of the servicers – if they were doing their job, nobody would be able to stay in their homes for an elongated period without paying.

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to “WaPo Constructs Morality Play of Homeowners, Instead of Mortgage Lenders”

Of course these same commentators have no problem with the banks and other busninesses that make the decision to default on loans. Even when businesses have the money to make payments, they often will break contracts because it is good business. This is however fine with the likes of Brady Dennis, because it is a smart business move, but when homeowners don’t break into their retirement savings to pay for their mortgage, it is a moral outrage.

The hypocrisy of some of these so called conservative commentators is nothing short of amazing.

But the servicers are doing their jobs. They don’t work for the borrowers. They don’t even really work for the MBS investors (despite their contracts). They work for their owners, the banks. The prime duty of the servicers is to force borrowers into foreclosure so that the banks can collect on their CDS and CDO ^2. That’s where the real money comes from.

David: It’s time to propel the true meme that the servicers intentionally force borrowers into foreclosure because a foreclosed $300,000 mortgage is worth $9,000,000 to the bankers betting against it. This is why the bankers pay their PR firms (and the WaPo) to keep propelling the ‘deadbeat borrower’ meme, to counteract the truth about how so many went into default (many more than the liar loans). We know that people like wavpeac can afford their mortgages and are not deadbeats, so, using her well-documented example, and the Earls’ (listen to this Dylan Ratigan interview to understand that the bank was extorting tens of thousands of dollars from the Earls with the threat of foreclosure if they didn’t pony-up, with no accounting for the charges), we can show that the servicers are intentionally trying to force people already struggling with their bills into foreclosure, because that is more profitable for the banks than merely having people pay off their loans. The only purpose for the entire mortgage securitization scheme is to bet against it. The borrowers and investors are mere pawns in the bankers get-rich-quick Ponzi scam.

I really hate to have to do this, because it is so unsettling, but I am going to be e-mailing my niece to urge her to check up on the status of the mortgage she and her husband took out on a McMansion in WA (which she now concedes is 20 percent to big for them and their children). Her husband has a stable well-paying job, and there’s no problem with them keeping up with the charges; but how many times will they have to pay off the mortgage, if it’s owned by more than one entity? Better be safe than sorry ten years from now.

I read the case study of Joshua Bartlett, and believe he is just someone caught in the machine. he really had no chance because of the games the banks have been playing with everyone and the crash of 2008 which is attributable to them and not to him. It seems to me that three years of free rent in his House is least he should get by way of compensation for the grief this corrupt financial Wall Street run sector has out him through. So, the only moral hazard I see in this one situation is the one created by the Bush and Obama Administrations in not putting and end to the fraud in the Fall of 2008 and early 2009 by taking the banks into resolution, uncovering the details of the various frauds in the system and sending many bankers, servicers and traders to prison.

That is the real moral hazard here. What is WaPo doing running articles like this? Paying off Pete Peterson?